Brexit and Lloyd’s of London

The latest (but perhaps not the last) Brexit deadline is set for January 31, 2020. Yet the insurers most affected by the U.K.’s divorce from the European Union (EU) have plans in place to continue business with minimal disruption. Indeed, U.K. businesses have been operating in the EU’s Single Market for so long, many are questioning how these entities will adapt to increased regulations. One entity where these questions are particularly relevant is Lloyd’s of London.

What is Lloyd’s?

Lloyd’s is not an insurance company, but a marketplace where capital and underwriting converge on a global platform operated by the Corporation of Lloyd’s. Lloyd’s includes five key stakeholders: syndicates, which function as underwriting entities, assuming risks and paying claims; managing agents, who capitalize and operate the syndicates; brokers, who are intermediaries between policyholders and syndicates; coverholders, which are local MGA’s that underwrite risks on behalf of a syndicate/managing agent (and which also enables the Lloyd’s market to operate globally without establishing local offices); and insurance buyers, many of whom buy insurance through Lloyd’s for complex, emerging or otherwise unique risks. Syndicates specialize in different types of insurance and reinsurance, often participating with each other on a subscription basis (meaning they only take on a part of the risk and pay part of the claim).

The consequences

With gross global premiums written at almost $45 billion in 2018, 13 percent of that generated by the post-Brexit European Union, there were legitimate concerns about how Brexit would affect Lloyd’s role in the EU marketplace. Due to Brexit, “non-admitted” U.K. insurers will no longer be able to conduct insurance business in some EU countries, meaning that nonauthorized insurers cannot conduct business in regulated insurance industries in a different market (which is currently the case in France, Italy, and under certain circumstances, in Germany).

However, Lloyd’s quickly pivoted to ensure that it will continue to provide non-life insurance throughout the European market, regardless of Brexit’s outcome. Although it is anticipated that most of the European Economic Area (EEA) reinsurance will still be written through London on a cross-border basis, in case of a hard Brexit non-life insurance could be covered by Lloyd’s Brussels, which opened in 2018.

Still, non-EU coverholders for Lloyd’s of London—who could previously conduct business throughout the EU without physical offices and permissions from member states—will have to seek proper authorization from the EEA under a “Coverholder Appointment Agreement” (CAA) with Lloyd’s Brussels. This may affect where managing agents raise capital.

Will these new regulations be felt in the US?

A very substantial portion of Lloyd’s international business—over 40 percent of global premiums as of 2018 —is generated in the U.S., with significant exposure on the U.S. insurance lines. While the new regulations will not directly affect business between the U.S. and U.K., the primary concern will be the volume of business in the EEA, which could potentially decrease. But if Lloyd’s pivots some of its business away from Europe, the U.S. could get more attention. In fact, John Neal, Lloyd’s chief executive, stated in an interview with the Financial Times that “If you’re in insurance or investment banking or banking, one dollar in two dollars of everything you do is still U.S. derived, so it’s very important that you maintain your connection and your relevance with the U.S. market.”